Examining Judges' Hobson's Choice Approach to Amending Complaints Lauren A. Ormsbee and Michael D. Blatchley, as Published in New York Law Journal August 21, 2015 Lauren A. Ormsbee and Michael D. Blatchley In Loreley Financing (Jersey) No. 3 Limited v. Wells Fargo Securities, the U.S. Court of Appeals for the Second Circuit reversed a district court's dismissal of a complaint "with prejudice" because the "procedure by which the district court denied leave to amend was improper." According to the Second Circuit, the error occurred when the district court "presented Plaintiffs with a Hobson's choice" to either immediately amend the complaint after defendants previewed their arguments for dismissal, or forfeit the right to do so later after the court's decision on the motion to dismiss.1 This aspect of the Loreley Financing decision may have an impact on the individual practices of more than a dozen district court judges in the Southern District of New York who have adopted or employed a similar amend-now-or-never approach with respect to dismissals with prejudice. Loreley Financing involved allegations of fraud and other common-law violations brought against Wachovia Bank NA (which was later acquired by Wells Fargo) and two collateral managers of collateralized debt obligations (CDOs) by several investors who lost millions of dollars through their investments in the CDOs. On March 28, 2013, Judge Richard Sullivan dismissed plaintiffs' complaint in its entirety under Rule 12(b)(6) of the Federal Rules of Civil Procedure and denied plaintiffs' request to replead.2 In an extensive 57-page opinion, the Second Circuit reversed the district court's dismissal of the claims against the bank and one of the collateral managers, but upheld the dismissal of claims against the other collateral manager. The Second Circuit also held—"separate and apart from [the dismissal] errors—that the district court exceeded the bounds of its discretion in denying plaintiffs leave to amend their complaint."3 The court specifically determined that "the procedure by which the district court denied leave to amend was improper" because it forced plaintiffs to either replead "[w]ithout the benefit of a ruling" or waive the right to do so later.4 Practice in Southern District At the heart of the Second Circuit's review of the district court's denial of leave to amend was the lower court's requirement that plaintiffs either choose to amend their complaint following a pre-motion presentation by defendants of the grounds for their motion to dismiss on the pleadings, or forever forfeit their ability to replead. In Loreley Financing, Judge Sullivan informed plaintiffs during the pre-motion conference that "one of the reasons I have a pre[-]motion conference policy…is that it allows defendants to front their arguments and often then it presents an opportunity for plaintiffs to amend their complaint. And if [plaintiffs] don't take advantage of that opportunity, then I don't necessarily give them another opportunity later."5 Plaintiffs stood on their complaint, and the district court denied their request to amend following its dismissal, citing only the admonition made during the pre-motion conference.6 Judge Sullivan's amend-now-or-never approach to complaints is far from unique among judges in the Southern District of New York. For example, Judge Richard Berman's rules of practice state: "Motions to dismiss in civil cases will be decided 'with prejudice' where the opposing party has been given the opportunity to amend the pleadings after receiving the moving party's pre-motion letter." The individual rules of practice of almost a dozen other judges formally adopt a similar approach.7Other judges, like Sullivan in Loreley Financing, have not formalized this procedure in their individual practices, but have employed this approach in certain cases to deny leave to amend based on plaintiffs' choice not to replead following the exchange of pre-motion letters.8 Consistent with its widespread and growing use among district court judges, prior to Loreley Financing, this pre-motion amendment "procedure" appeared to have at least the tacit approval of the Second Circuit. For example, in Rosner v. Star Gas Partners, the Second Circuit found that the district court did not abuse its discretion in dismissing a complaint with prejudice when plaintiffs declined an opportunity to amend after defendants previewed their arguments in support of their motion to dismiss at a pre-motion conference.9 Similarly, in Bellikoff v. Eaton Vance, the Second Circuit noted that plaintiffs were not entitled to an "advisory opinion from the court informing them of the deficiencies in the complaint and then an opportunity to cure those deficiencies" in upholding the district court's denial of leave to amend.10 Second Circuit's Rebuke The Second Circuit in Loreley Financing sharply criticized the court's use of this now-or-never approach to amendments. As the Second Circuit held, the district court's treatment of the plaintiffs' "decision to stand by the complaint after a preview of defendants' arguments—in the critical absence of a definitive ruling" was an abuse of discretion and effectuated an improper "forfeiture of the protections afforded by Rule 15" of the Federal Rules. In so holding, the Second Circuit reaffirmed the "strong preference for resolving disputes on the merits" and the "liberal spirit of Rule 15," which requires that leave to amend be "freely" granted whenever "justice so requires." The Second Circuit specifically held that leave to amend cannot be denied absent a finding of undue delay, bad faith, dilatory motive, futility or other grounds traditionally considered a proper basis for denying leave to amend.11 The Second Circuit also made clear that the approach of requiring plaintiffs to immediately amend pre-motion or waive their ability to do so later was not one of the long-held "proper" bases for denying leave, noting that the Federal Rules themselves "do not speak to the use of pre-motion conferences." While the Second Circuit did not find the use of pre-motion conferences alone "problematic" because such conferences "may in many instances efficiently narrow and/or resolve open issues," the court held that the impropriety occurred …when the district court…presented plaintiffs with a Hobson's choice: agree to cure deficiencies not yet fully briefed and decided or forfeit the opportunity to replead. Without the benefit of a ruling, many a plaintiff will not see the necessity of amendment or be in a position to weigh the practicality and possible means of curing specific deficiencies. *** The present case combines a complex commercial reality with a long, multi-prong complaint. In such situations, pleading defects may not only be latent, and easily missed or misperceived without full briefing and judicial resolution; they may also be borderline, and hence subject to reasonable dispute.12 The Second Circuit concluded that amendment of the pleadings against the dismissed collateral manager would not be futile, and instructed the district court to grant plaintiffs leave to amend the complaint to address any pleading defects identified in its order.13 Broader Impact In light of Loreley Financing, district courts that have adopted approaches similar to that employed by Judge Sullivan may be forced to revisit their individual rules of practice to ensure compliance with the federal rules. While district courts may continue to view pre-motion letter exchanges or conferences as helpful means of narrowing contested motion to dismiss arguments, Loreley Financing suggests such procedures can no longer be deployed to deprive a plaintiff of a later opportunity to amend. Indeed, to the extent a district court provides a plaintiff with the "Hobson's choice" of amending prior to a ruling on a motion to dismiss or forfeiting any further right to amend, that court risks reversal of any subsequent dismissal "with prejudice."14 Such a risk would appear to be especially acute in complex litigation, such as securities, antitrust and other complex cases similar to Loreley Financing that involve difficult or nuanced pleading issues that may be "borderline" and "subject to reasonable dispute."15 Loreley Financing's impact also extends beyond the so-called "Hobson's choice" approach to motion-to- dismiss briefing criticized by the Second Circuit. By reaffirming the fundamental principles underlying "the liberal standard set forth in Rule 15," Loreley Financing protects plaintiffs with meritorious claims from dismissal absent "the benefit of a ruling" from the district court.16 WhileLoreley Financing will of course apply whenever a plaintiff is faced with an invitation to amend immediately or waive the right to replead, any plaintiff can cite the opinion in support of an argument that leave to amend cannot be denied without judicial guidance as to "the precise defects" in a complaint. As a result, the Second Circuit's opinion may also help improve the quality of complaints in complex cases by incentivizing district courts to more fully address how pleading defects may be cured—a result that the Second Circuit determined was "'consistent with our strong preference for resolving disputes on the merits.'"17 Endnotes: 1. Loreley Financing (Jersey) No. 3 v. Wells Fargo, No. 13-1476-cv, 2015 WL 4492258, at *24-26 (2d Cir. July 24, 2015) (Loreley Financing). 2. Loreley Financing (Jersey) No. 3 v. Wells Fargo, 12 Civ. 3723 (RJS), 2013 WL 1294668 (S.D.N.Y. Mar. 28, 2013) (Loreley I). 3. Loreley Financing, 2015